A veritable chorus of large US corporations has chopped their forecasts down a few sizes, citing the China slowdown, wobbly demand from emerging markets, the ongoing fiasco in Europe, or weakness in the US. Among the usual bellwether suspects:
Caterpillar raised eyebrows on Monday when it lamented “fairly anemic” global growth and a slowdown in China, not just for the quarter or the year, but through 2015. FedEx cut its outlook on September 18 due to lower shipping volumes and a shaky global economy. On September 7, Intel slashed its third-quarter revenue outlook, ominously on weakness in the enterprise segment and in emerging markets. On August 30, the International Air Transport Association announced that July air-freight was down 3.2% worldwide from last year. And in July, UPS lowered its guidance.
But you wouldn’t know it from the stock markets, which are supposed to predict future turns in the economy better than any other measure, based on the collective wisdom of innumerable astute market participants—or rather computers, algos, and fat fingers. The S&P 500, for example, is up 22% over the last 12 months. A phenomenal run.
And so today, the Business Roundtable (BRT), an association of CEOs from the largest US corporations, made an ugly trend much uglier: CEOs believe the next six months are going to be tough; and they’re reacting to it by slashing capital expenditures and jobs.
The BRT CEO Economic Outlook Index plunged to 66 in the third quarter, from 89.1 in the second quarter. That was not only “the lowest reading since the third quarter of 2009,” when the US economy was still in the trough of the Great Recession, but also “the third largest single quarter drop in the survey’s history.”
And the largest drop? From 78.8 in Q3 2008 to 16.5 in Q4 2008. Off a cliff. These CEOs were caught off guard by the financial crisis, ensconced in their own hunky-dory world. Incredibly, the index had edged up from 74.5 in the prior quarter even though the financial crisis had been making headlines for a year, the housing bubble had blown up, financial institutions were cracking for all to see, and Bear Stearns had already collapsed. These CEOs have zero predictive capabilities.
From its recent peak in Q1 2011 of 113, it has been a steep and bumpy slide to today’s 66. Above 50 in this diffusion index means growth, so 66 is still in positive territory, if barely so. The three sub-indices—sales, capital expenditures, and employment—didn’t help.
In the sales index, 58% of the CEOs expected sales to increase over the next six months, down from 75% in the prior quarter. A low number: six months after the Bear Stearns collapse, and just before the collapse of Lehman and AIG, 78.8% of our prescient CEOs had expected sales to grow—only to see them nosedive weeks later.
The index for capital expenditures was worse: only 30% of the CEOs said they would increase capital expenditures, down from an already low 43% in the second quarter. The lowest score since Q3 2009—when the world was scrambling to get out of the trough of the Great Recession.
The employment index took the biggest hit: only 29% expected to create jobs, down from 36% in Q2; but 34% expected to cut jobs, a jump from 20% in Q2. Hence, more CEOs are planning job cuts than job increases. For a worse figure, you have to go back to Q4 2009—when the unemployment rate hit 10%!
These trends “reflect global demand flattening out, particularly in Europe and China,” said BRT Chairman and Boeing CEO Jim McNerney during the news conference. On top of that are “domestic policy issues” that could have “negative impact on the economy and business climate,” he added, including the fiscal-cliff of tax increases, spending cuts, and a failure to raise the debt ceiling. That uncertainty throws “cold water on long-term planning.”
That the CEO Economic Outlook Index evokes the dark days of double-digit unemployment is not a particularly good sign. It crowns a pile of slashed forecasts from bellwether companies. The old-fashioned among us would expect stock markets to have anticipated that corporate downdraft. But that hasn’t happened.
If QE, QE2, QE3, the bubbly expectations of QE4, and of course QEx have accomplished anything, it is the miraculous decoupling of the stock markets from reality. Gravity can be turned off, apparently, in this new QE world of ours where no one has gone before. But then, gravity has the nasty habit of reasserting itself at the worst possible moment.
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Despite the law of inverse squares, gravity has a nasty tendency to reassert itself most forcefully the further up you are.